SMALL-CAP ETFS HOLD BREAKOUTS AND CONTINUE TO LEAD -- RUSSELL 2000 VALUE ETF NEARS NEW HIGH -- TECHS AND BIOTECHS WEIGH ON RUSSELL 2000 GROWTH ETF -- SHORT-TERM YIELDS SURGE AS 10-YEAR CHALLENGES RESISTANCE -- RISING RATES BENEFIT REGIONAL BANKS
SMALL-CAP ETFS HOLD BREAKOUTS AND CONTINUE TO LEAD... Link for today's video. A strong breakout should hold, and a weak breakout should fold. The Russell 2000 ETF (IWM) and S&P SmallCap iShares (IJR) broke out with big moves over the last four weeks and it is important that these breakouts hold. A peak below the March highs and a failed breakout would be quite negative. It hasn't happened yet so the charts remains bullish. Chart 1 shows IWM breaking the wedge trend line, breaking above the 200-day moving average and exceeding its May highs with a move above 116 this month. This breakout is clearly bullish until proven otherwise, which means it needs to hold. The broken resistance zone and rising 200-day moving average combine to mark a support zone in the 111-113 area. A close below 111 would negate the breakout and call for a reassessment of the chart. Until such a move, I would stay bullish and expect a challenge to the, gasp, March highs. The indicator window shows the price relative (IWM:SPY ratio) breaking above resistance from the mid May highs as IWM starts to outperform SPY again. Chart 2 shows the S&P SmallCap iShares with similar characteristics.
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Chart 1
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Chart 2
RUSSELL 2000 VALUE ETF NEARS NEW HIGH... The Russell 2000 ETF can be divided into the Russell 2000 Value ETF (IWN) and the Russell 2000 Growth ETF (IWO). The value ETF shows more "chart" strength than the growth ETF, but the growth ETF has started to outperform the value ETF on a relative performance basis. Chart 3 shows the Russell 2000 Growth ETF within a clear uptrend over the last eleven months. The ETF hit a new high in March, corrected with a wedge in April-May and resumed its advance with a breakout in late May. Notice that IWN came within 1 cent of its March high last week. IWN is much closer to its March high than the Russell 2000 Growth ETF and this means it shows more "chart" strength. Also notice that the April-May correction was 7.8%, which was almost half the decline of the Russell 2000 Growth ETF. This also suggests more "chart" strength.
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Chart 3
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Chart 4
Chart 4 shows the Russell 2000 Growth ETF hitting a new high in early March and then falling over 14% with the move below 124. The ETF managed to firm in the 124-126 area from mid April to mid May and then breakout with a surge to 136. Broken resistance and the early June low combine to mark a support zone in the 128-130 area. This area needs to hold to keep the breakout alive. The indicator window shows the price relative (IWO:IWN ratio), which measure the performance of growth relative to value. Notice that growth started outperforming in early May as the price relative turned up. This is positive for the market as long as it holds up. Why? Because the growth end of the market carries more risk and relative strength suggest a strong appetite for risk.
KEY GROWTH AND VALUE SECTORS IN RUSSELL 2000... As noted on Monday, chartists can understand an ETF by looking at the sum of the parts. The next two tables show the top sectors for the Russell 2000 Value ETF and Russell 2000 Growth ETF. Notice that financial services accounts for around 40% of the value ETF. Conversely, healthcare and technology account for around 41% of the growth ETF.
- Top Holdings (value)
- Financial Services = 39.9%
- Producer Durables = 14.27%
- Consumer discretionary = 10.12%
- Technology = 9.38%
- Utilities = 7.04%
- Energy = 7.04%
- Top Holdings (growth)
- Healthcare = 21.67%
- Technology = 18.44%
- Consumer discretionary = 16.33%
- Producer Durables = 13.97%
- Financial Services = 9.67%
- Materials = 8.9%
A look through the these sectors shows lots of regional banks in financial services, lots of small biotechs in healthcare and lots of small tech stocks in the technology sector. Small biotechs and techs have high betas, which means they move more than the broader market. If a stock has a beta of 2 and the S&P 500 decline 5%, then that stock would be expected to decline two times more than the S&P 500 (10%).
SHORT-TERM YIELDS SURGE AS 10-YEAR CHALLENGES RESISTANCE... Treasuries fell and yields surged after the Labor Department reported a .4% increase in the Consumer Price Index (CPI) for May. This was the biggest jump since February 2013 and may signal that inflation is picking up. Treasuries, which loathe inflation, sold off on the news and the 2-year Treasury Yield ($UST2Y) moved to its highest level of the year. Actually, chart 5 shows the 2-year yield hitting a new high for 2014 on Monday and extending its gains today. The 2-year yield is the highest it's been since early September 2013.
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Chart 5
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Chart 6
Chart 6 shows the 10-YR Treasury Yield ($TNX) moving back above 2.6% (26) and challenging resistance. Not much has really changed since I showed this chart last week. The yield surged from 2.4% to 2.6% and then consolidated for over a week. A follow through break above the mid May high and January trend line would suggest that yields are moving higher. The indicator window shows the 7-10 YR T-Bond ETF (IEF) on the verge of a support test at 102.
RISING RATES BENEFIT REGIONAL BANKS ... Chart 7 shows the Regional Bank SPDR (KRE) surging over 1% today. Overall, the ETF broke wedge resistance with an 11+ percent advance from mid May to early June. KRE was overbought after this move and corrected with a small falling flag the prior five days. Today's surge is challenging the flag trend line and a breakout would signal a continuation higher. The trend line break and resistance from the May highs combine to mark a support zone in 38-39 area. I will raise this zone if the ETF moves above its early June high. The indicator window shows the price relative (KRE:SPY ratio) breaking above its May high in early June and forming a higher low with this week's up turn.
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Chart 7
ETRADE, TD AMERITRADE AND SCHWAB MAKE BOLD MOVES... Higher short-term rates could also benefit discount brokers because higher rates may allow them to start charging for money market deposits. Chart 8 shows Charles Schwab (SCHW) finding support in the 24.5 area from April to June and then surging above resistance at 26.5 in early trading on Tuesday.
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Chart 8
Chart 9 shows E-trade (ETFC) with a chart similar to AMTD above. Yes, a big head-and-shoulders reversal may have formed from January to May, but the stock never confirmed with a neckline break. ETFC held support in the 19.5-20 area from mid May to mid June and then surged towards resistance today. A breakout would be bullish.
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Chart 9
Chart 10 shows TD Ameritrade (AMTD) finding support around 30 from January to June and bouncing off support with a big move today. Notice that TDAM is filling last week's gap. A breakout at 31.2 would be bullish. Watch support at 29.8 for a failure. Note that breakouts in all three could also suggest that retail investors are coming into the market. Of these three, I think Etrade and Schwab are the strongest.
